When Amtrak releases its much-delayed financial
report for fiscal year (FY) 2000 (which ended October 31, 2000), it
is expected to show operating losses of $944 million for the
year--a new record of red ink for the deeply troubled service. The losses
will be greater than the previous record loss of $916 million
achieved by Amtrak's management team in FY 1999. The rail service's operating
losses have averaged $812 million per year over the past decade.
Sustained deficits of this magnitude on an annual revenue base of
passenger ticket sales of similar size means that Amtrak is
incurring costs of $2 for every ticket dollar it sells. The more it
sells, the more it loses.
This
inability to get out of the red has led Amtrak's management to seek
higher and higher subsidies from the federal government. Last year,
Amtrak sought unsuccessfully to obtain $10 billion in federally
subsidized bond-issuing authority. This year's request,
formally unveiled on February 2, is for triple that amount in
grants and interest-free loans.
With
another record-breaking loss soon to be reported, Amtrak's
financial performance is moving further and further away from
meeting its congressionally mandated and statutorily required goal of
financial self-sufficiency by December 2, 2002. Because of Amtrak
management's inability to reverse this slide toward fiscal
self-destruction, Congress and the Bush Administration should
demand the immediate resignation of the board of directors and top
management of this troubled organization.
Despite the longest peacetime economic
expansion in America's history, with unprecedented prosperity that
allows Americans to travel in record numbers and profits to soar
for most businesses, Amtrak's current management has achieved the
company's worst-ever financial performance. There is little reason
to expect that this management team will do any better in the
future when the economic environment may be less favorable than it
is today. The current management team has had its chance, but
instead of improving service and costs, it has wasted more than
$3.6 billion of the taxpayers' money. Amtrak's leadership should be
replaced with individuals who have a proven record of success in
business and/or transportation and who can give the passenger
railroad a fighting chance to meet the FY 2002 goal of break-even
operations.
Other countries have demonstrated that
loss-making railroads can be turned around with new approaches and
an infusion of new management personnel committed to those
approaches. Passenger rail systems in Australia, the United
Kingdom, Argentina, Japan, and New Zealand, for example, have been
restructured and privatized, and these fundamental reforms have
resulted in profitable (or at least less costly to operate) systems
and higher ridership. The experience gained and lessons learned in
reviving these once down-and-out passenger rail systems, combined
with fresh management, could help Amtrak fulfill the promise of
self-sufficiency that has eluded the current management team since
it took over in 1998.
AMTRAK'S LOSSES PILE UP
As
dozens of dot-com companies demonstrated just last year, no
business can survive a red ink hemorrhage of great magnitude for
long. Amtrak has been an exception to the bottom-line rules of a
competitive market because it has been allowed to reach repeatedly
into the taxpayers' pockets for subsidies. All of the available
evidence indicates that these huge subsidies--$23 billion since
1970--are now inadequate to the task of keeping the company afloat.
In asking for a new 20-year, $30 billion bailout, Amtrak's
management admits as much. Growing evidence suggests that unless
management practices are drastically reformed, Amtrak may soon face
a cash flow bind that could force reductions in operations.
The
threat of pending insolvency may largely explain a recent series of
events relating to Amtrak's operations:
-
Amtrak President George Warrington
admitted that Amtrak is facing a serious financial squeeze when he
presented the railroad's $30 billion subsidy request. A sense of
desperation characterized Amtrak officials and supporters late last
year when they attempted unsuccessfully to get Congress to approve
$10 billion in subsidized bond-issuing authority. Although Amtrak's
management justified the request as a necessary capital investment
in the high-speed system of the future, the money most likely would
have been used to meet pending cash flow shortfalls.
-
In the week before Clinton appointees at
the Department of Transportation left office, Amtrak sought, but
did not receive, a $28 million Transportation Infrastructure
Finance and Innovation (TIFIA) loan for a $100 million
locomotive remanufacturing project. This was another desperate
effort to bridge a yawning financial gap with taxpayers' money.
-
In an effort to maintain Amtrak's cash
flow regardless of cost, the Clinton Administration last year
forced the Massachusetts Bay Transportation Authority (MBTA) to
continue contracting with Amtrak for maintenance of MBTA commuter
rail cars, even though Amtrak offered the lowest quality at the
highest cost. As federal law requires, the
Authority had put the renewal of its maintenance contract out for
bid shortly before the old contract with Amtrak expired. Although a
qualified private contractor came in with the lowest bid at $175
million and Amtrak's offer was $291 million, the Clinton
Administration ordered the MBTA to stick with Amtrak, thereby
forcing the taxpayers and rail commuters of Massachusetts to pay an
extra $116 million in unnecessary costs.
- Amtrak temporarily closed down some of its
worst performing lines through the month of January 2001,
attributing the suspension of service to weather-related problems.
The lines that were shut down included the four trains running
daily between Chicago and Pontiac, Michigan, and two trains running
between Chicago and Janesville, Wisconsin. In the three months
before its cancellation, the Janesville line was carrying fewer
than five people per train; Amtrak reported that ridership reached
as many as 11 passengers per train during the busy summer vacation
season.
Congressional disappointment with Amtrak's
performance, which has been ongoing since the government took over
the service in 1970, reached a flash point in the mid-1990s when
annual losses soared above $800 million, ridership declined, and
Amtrak's management caved in to costly union wage and work rule
demands. Congress responded by passing the Amtrak Reform and
Accountability Act of 1997 (P.L. 105-134), which the President
signed into law on December 2, 1997.
Among the many important provisions of
this law were requirements that (1) Amtrak reach operating
financial self-sufficiency after FY 2002 and (2) a new seven-person
board of directors (called the Reform Board, not to be confused
with the Amtrak Reform Council created by the same law) be
appointed. Concurrent with these changes was the enactment of the
Taxpayer Relief Act of 1997 (P.L. 105-34) with a provision that
provided Amtrak with a refundable tax credit of $2.2 billion in
1998-1999, over and above the annual federal subsidies Amtrak
receives through the appropriations process. The purpose of this tax
credit was to give Amtrak and its new board the extra capital,
equipment, and improvements necessary to facilitate attainment of
the self-sufficiency goal. Yet as Amtrak's current financial
performance reveals, neither the board nor the additional $2.2
billion made much difference in the system's financial
performance.
THE NEED FOR BETTER MANAGEMENT
While Amtrak's worsening performance
should be sufficient reason for both Congress and the President to
call for the resignation of Amtrak's board and top management team,
the problem of poor management is compounded by the questionable
nature of the board members' appointments in 1998. The individuals
President Clinton appointed to the board for the most part failed
to meet the qualifications set forth in law, including two who had
served on the previous board that had been judged unsuited for the
task by Congress.
Specifically, P.L. 105-134, which amended
Title 49 of the United States Code, required that a new "reform"
board take over the operations of Amtrak by July 1, 1998, and be
comprised of members who "have technical qualifications,
professional standing and demonstrated expertise in the fields of
transportation or corporate or financial management."
However:
-
A review of the qualifications of Amtrak's
current board reveals that, at most, only one of the six members fits this
requirement, and even that could be debated because the relevant
experience of this member is limited to running a money-losing
public transit system in New Jersey.
-
Another four of the six spent their
professional careers as politicians and elected officials--three as
governors, one as mayor--and, other than ceremonial appointments to
transportation-related advisory councils, do not meet the
qualifications stipulated in the law.
- The sixth served, and still serves, in
part as a transportation lobbyist in a Washington, D.C., law firm,
which might be viewed as transportation experience but is not the
successful operating experience Members of Congress had in mind
when they stipulated in law the essential qualifications for
service on the Amtrak board.
Of
equal importance was Congress's intent that the board be comprised
of members who had not served on the previous board. President
Clinton ignored this request and reappointed two board members (as
well as another who served in the early 1990s) despite
congressional objections. Noting that one-third of the Clinton
appointees were holdovers, Senator John McCain (R-AZ) remarked: "I
thought even the President would recognize we did not call for a
new Board only to appoint the same people."
An
added complication confronting the Bush Administration is the law's
stipulation that only one of the seven board members can be an
Amtrak or federal government employee. Under the Clinton
Administration, this slot was filled (using an option provided in
the reform law) by the Secretary of Transportation, an appointment
that many would view as appropriate given the department's
responsibility for, and expertise in, meeting America's
transportation needs. Moreover, given Amtrak's worsening financial
problems, the two years left on its legally mandated five-year path
to financial independence, and its renewed demands for even larger
taxpayer subsidies, it would seem logical that the Bush
Administration would want one of its own transportation officials
on the board.
But
it may not get that opportunity. Amtrak board member Tommy
Thompson, former governor of Wisconsin and now the Secretary of the
U.S. Department of Health and Human Services, has indicated that he
does not want to resign from the board. It is difficult to see how
Secretary Thompson would be able to give Amtrak the intense
attention it needs at this critical point while he also leads the
Administration's strategy to win approval of major reform
initiatives for Medicare, welfare, and health coverage for the
uninsured.
Because of the "reform" board's three-year
track record of fiscal failure and programmatic delays, Congress
and President Bush should insist on appointing a new board. The
appointees should be highly experienced executives and experts
whose sole focus is rescuing the railroad and ending the
hemorrhaging of taxpayers' money. Amtrak's existing board and
senior managers should tender their resignations immediately, and
the President should submit--and Congress should approve--a new
slate of candidates consistent with the qualifications described in
Title 49, Section 24302 (2)(C)(i) of the United States Code.
How to Get to a New Board
Although the laws governing Amtrak have no provision to allow
either Congress or the President to replace members of the board at
their discretion, neither branch of government is without
sufficient means of persuasion to achieve that end. Some would
argue that it is a virtually implied statutory power for the
appointing authority to fill vacancies using the same process that
governs the original appointment.
The
President, for example, in submitting his own FY 2002 budget to
Congress, could make that year's Amtrak subsidy--likely to be near
the $500 million provided this year--contingent upon the
resignation of the current board and congressional approval of a
new one. If Congress appropriates funds without requiring a new
board, the President could threaten to veto the bill unless a new
board capable of exercising effective stewardship over the
taxpayers' money were in place. More immediately, the President
could withhold a decision on the still pending $28 million TIFIA
loan request that Amtrak has submitted to the Transportation
Department until a new board is in place.
For
its part, Congress could simply delay appropriating any money for
Amtrak's FY 2002 subsidy until such time as the current board
agrees to step aside. Likewise, the tax committees of Congress
could delay review of any Amtrak-related tax proposals until such
time as a new board is in place with members who could more
skillfully implement and manage the long-overdue reforms at Amtrak
as well as any financial support Congress may choose to
provide.
CONCLUSION
For
too long, Congress and the executive branch have accepted Amtrak's
management view that a passenger rail system operating in today's
environment must be a government-operated monopoly requiring large,
perpetual taxpayer subsidies. Such views are becoming increasingly
outdated around the world.
By
the late 1980s and early 1990s, innovative leaders willing to think
outside the box had realized that there were alternatives to the
socialist model and had begun to act upon this realization. In
countries from Argentina to New Zealand, reforms that rely upon
competition and private-sector participation have been implemented,
with improved service at lower costs as the consequences. Amtrak's
worsening fiscal outlook is an opportunity for Congress and the
President to act decisively and to implement needed reforms to
achieve these results in the United States as well.
Ronald D. Utt,
Ph.D., is Senior Research Fellow in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage
Foundation.